Silicon Valley's mentoring gap

Mentoring is essential to the survival of start-ups. That's because so many of them are founded by people who have an innovative idea, but lack prior experience running companies.

If Worcester wants to draw in more start-ups is must provide such mentoring. And if Worcester is looking for mentoring when it comes to how to build a thriving start-up common, it could do worse that looking at Silicon Valley which is widely viewed as the world's best.

But it may be vulnerable due to a mentoring gap. And that could spell opportunity for other regions of the world seeking to attract world-class entrepreneurial talent.

That's the word from Mike Cagney, chief executive officer of SoFi, a student loan start-up in San Francisco's Presidio neighborhood. When I spoke with him in December, he provided two key insights about flaws in the Silicon Valley Start-up Common. He said there is not enough capital for second-stage investments, and many start-up CEOs can't get mentoring to deal with the problems that keep them up at night.

Mr. Cagney is one of the smartest CEOs I've spoken with (and I interviewed over 160 of them in the last couple of years for my latest book, "Hungry Start-up Strategy").

What makes him so smart? He has identified a big, growing market opportunity with some significant regulation-imposed inefficiencies. And he co-founded SoFi (short for Social Finance) to exploit that inefficiency profitably. And now, SoFi is scrambling to lock up the choicest market segments before competitors figure it out with the benefit of $77 million in capital, much of it from RenRen, China's version of Facebook.

Mr. Cagney pointed out that in Silicon Valley, capital has fled from the middle to the extremes of the start-up risk spectrum. More specifically, so many individuals have become wealthy in Silicon Valley over the last several years that there is much more capital available from so-called angel investors who provide seed capital for start-ups.Moreover, there is ample capital available for companies that need one more capital injection before they reach the size at which they can sell their shares to the public or get acquired.

What is dwindling is the availability of capital for companies that have burned through their seed capital and need the next level of funding -- so-called Series A round. The reason for the dearth of such capital is that the venture capital firms that provided it in the past have not generated spectacular investment returns for the ir limited partners in recent years.

As a result, these venture capitalists are struggling to raise new rounds of capital from their limited partners since they do not believe that the potential returns of providing that mid-level capital is worth the risk of loss.

As Mr. Cagney explained, "The $5 million to $10 million dollar check just isn't out there like it used to be. However, it is not hard to raise $500,000 seed capital and ironically it is not hard to go out and get a $25 million to $30 million dollar Series B at a $100 million valuation. What is hard is getting that $5 million to $10 million Series A."

The result of the proliferation of seed capital is that too many start-ups get funded in Mr. Cagney's view. More specifically, more start-ups are able to get seed capital, but the angel investors are not generally willing to help the start-ups beyond writing a check.

However, in Mr. Cagney's view, most first-time start-up CEOs need help because they do not have prior experience making the right decisions required to build the company. More specifically, these start-up CEOs must hire talent, create a strong culture, build products that attract customers, pick a market to target, and develop a business model.

And many start-up CEOs need mentorship to get help with those decisions. Unfortunately, most of the angel investors pursue an investment strategy of placing many bets, assuming most of them will be losers, and hope that one or two will be big winners that will more than offset their losses from the losers.

As Mr. Cagney explained, "There are too many startups that are seed financed and not enough people willing to give them time and focus. If you've come out of school, you've never started a business before, you go into a start-up you don't even know what to ask someone. You don't even know you need mentorship. And by the time you've figured it out it is too late in the process."

In most cases, this means that start-up CEOs cannot get the mentoring they need from their investors. And more generally, in Mr. Cagney's view, investors do not want to hear about the problems that face the CEOs in whose companies they invest.

In Mr. Cagney's view, those investors care only about getting a big return on their investments. And listening to a CEO's challenges is more likely to make investors think about replacing that CEO with one who reports ever-better results at each board meeting.

Some start-up CEOs seek out others in their position for advice. But in Mr. Cagney's experience, it is rare that other CEOs are inclined or have the time to help out their peers.

As Mr. Cagney explained, "The most important thing to a venture capitalist is returns. That focus often comes at the expense of developing the human capital in the companies they fund."

While Mr. Cagney considers himself lucky to have engaged investors, he notes the lack of support among the entrepreneur community.

“I'm guilty of this as well – I try to be responsive to requests for help, but these often get pushed down the queue as day-to-day business is all-consuming," he said. "And I feel it the other way – I have folks I can ask for help, but I can't ask them too much without becoming a burden."

“We're all facing similar challenges in building our businesses, and could learn from one another,” Mr. Cagney said. “At one point, this was the role of the early-stage venture capitalist – to facilitate best practices. With less 'A-round' firms out there, it just doesn't happen enough.”

It remains to be seen whether these challenges will reduce the number of successful start-ups in Silicon Valley. But unless things improve, it appears likely that there will be plenty of failed ventures. The question is whether those failures will slow down the wealth creation engine that creates so many angel investors.

Regardless of that outcome, Mr. Cagney's insights demonstrate the importance of mentoring for cities like Worcester that aspire to attract start-up CEOs.

Peter Cohan of Marlboro heads a management consulting and venture capital firm, teaches business strategy, and is the author of 11 books – most recently, “Hungry Start-up Strategy: Creating New Ventures with Limited Resources and Unlimited Vision.” His column runs Sundays and Wednesdays on telegram.com. His email address is peter@petercohan.com.